Digital-only banks: are they on the money?

Jul 07, 2016

“Our target is people who are always looking at their phones because they’re living their life on their smartphones. All these apps on their phones make their lives better but their banking app doesn’t.” – Anne Boden, CEO of Starling Bank

2016 is the year for challenger banks. A combination of looser licensing restrictions and a booming fintech startup scene has fostered the conditions for a new banking culture. With challenger banks already having gained traction in the US – GDR wrote about pioneering GoBank in 2014 – changes in UK banking legislation have seen a number of digital-only banks receive UK licenses this year. Free from legacy systems and the upkeep of bricks and mortar, these banks are indicative of a shift in consumer service expectations. According to management service Interim Partners, more than 75% of banking sector executives believe challenger banks have a significant technological edge over today’s high-street rivals.

Starling Bank is a new financial service launching in the UK this year. Starling Bank will only offer its customers current accounts so that customers can only focus on one product and navigate their personal lives with no distractions. Starling Bank is not about investing in the future but living comfortably in the here and now, informed by predictive data. The focus on the present fuelled the decision for Starling Bank to be app-only.

CaixaBank customers can check their balance on Facebook

Spain’s CaixaBank is targeting millennials with the launch of its mobile-only imaginBank. Tapping into millennial behaviours, in particular their enthusiasm for social media, imaginBank allows users to securely access their accounts through Facebook via a dedicated tab on the bank’s homepage. Account balances and recent transactions can be checked through the social network, while 24-hour customer service comes courtesy of Twitter and WhatsApp.

In Germany, Number26 is bridging the gap of online-offline convenience by turning cashiers at more than 9,000 retail stores into bank tellers through a partnership with cash payment system Barzahlen.

An entirely mobile, digital banking experience is also offered by Atom. Only accessible via an app, Atom lets users open a paper-free account in just a few taps. All customer communication is handled through the app and the bank uses an AI bot to guide its customer service team.Since its launch in April, a reported 30,000 people have registered.

Mobile-first Atom Bank gives users instant access to its full range of services

As a result of not having any branches and therefore having lower costs, Atom is passing the savings on to its customers. This is reflected in its favourable introductory interest rate of 2% AER on a one-year fixed rate saver, placing it in the top three highest rating accounts in the UK.

“This is the start of a remarkable transformation of the banking landscape for everyone,” said CEO Mark Mullen in a statement at the launch of Atom. “Our approach will be to constantly evolve and extend our offering, with monthly updates to our app and a dedication to providing a better value, greater transparency and a much more innovative banking experience.”

Atom claims that customers have grown disillusioned with the banking sector in recent years as controversial practices have hit the media. Mullen states that the intention with Atom is to offer “a genuine alternative to the self-interested banks that dominate the UK banking landscape.”

Research by TechWeekEurope suggests there is already significant consumer confidence in digital-only banks. A third (31%) believe that a digital-only bank would offer better services than a traditional bank, while 14% say they would trust a digital-only bank more than their traditional bank. The high street banks’ introduction of internet banking has helped pave the way for this. More than half (56%) of UK adults regularly use internet banking, according to the Office of National Statistics, and research by the BBA found UK customers will use mobile banking 895 million times this year, double the number of branch interactions.

A similar scene can be found in the United States where, according to a study by Viacom Media, banking as an industry runs the highest risk for disruption. 73% of American millennials would rather handle their finances with Google or Apple than with their own nationwide bank. Nearly half are counting on tech startups to overhaul the way banks work.

It is this disillusionment with traditional banking institutions that Atom hopes will attract British customers to a new type of banking model. The UK’s “big five” – HSBC, Barclays, Lloyds, RBS and Santander – all have mobile banking apps that are considered to have superior functionality to that of competing challenger banks, according to professional service company KPMG. One way the likes of Atom hopes to differentiate themselves is by being a new bank untarnished by the fallout of the recession. Mark Mullen has said that the intention with Atom is to offer “a genuine alternative to the self-interested banks that dominate the UK banking landscape.”

It is too early to say whether these new entrants will flourish. As much as people want to handle their finances quickly and securely, do they really want to make large transfers through an app? Two years ago, the well-established telecoms brand T-Mobile was unable to make a mobile banking proposition work in the US. The combination of a payment card and mobile application that gave customers the opportunity to bank through their phone failed to resonate. The landscape has changed in 2016 but I think there is still a big difference between managing your day-to-day current account and making pivotal financial decisions. I think a lot of people – in the UK and the US – would find the traditional environment of a physical bank and informed staff reassuring when taking out a loan or selecting an investment fund, however much they may have embraced digital banking.

BNP Paribas Fortis acts more like a community centre than a bank

The future of the physical bank is an uncertain one, and GDR is seeing a number of banks prove that there is still fluidity in bricks and mortar. Barclays now offers in-branch click-and-collect for Amazon purchases, while TSB’s new retail design aims to promote customer learning. BNP Paribas Fortis bank has refurbished its Belgian flagship in Ghent with a digitally-enhanced design to support local business startups. Wells Fargo in the US has maintained its physical presence whilst offering easily downloadable applications on smartphones to make methods of payment and money transfers simpler.

As early adopters put their assets into the likes of Atom and Starling, what their trust comes to yield remains to be seen. Yet, time is money and physical banks cannot afford to just wait and see. Closing the doors on traditional banking for an app-only existence may prove to be forward-thinking, but the bank that can successfully navigate the physical and digital in a way that demonstrates that it has real value to millennials may be the one that hits the jackpot.